Sri Lanka’s apparel sector is identifying clear pathways for recovery despite an 8% decline in exports during the first quarter of 2026 compared to the previous year.
The downturn, which began with a 3% dip in January, deepened to 11% in both February and March. While softer global demand has played a role, escalating tensions in the Middle East towards late February are expected to further affect supply chains in the coming months.
Rising operational costs are placing additional strain on manufacturers. Increased fuel and electricity expenses are adding nearly USD 3 million per month to industry costs, posing a particular challenge for smaller producers operating on tight margins. Industry leaders point to energy reform as a critical solution, with calls to enable open access and power wheeling to accelerate renewable energy adoption and reduce dependence on fossil fuels.
The United States, accounting for around 40% of Sri Lanka’s apparel exports, recorded a decline of just under 8% in Q1, slightly outperforming the overall sector. Despite tightening consumer conditions driven by inflation and higher fuel prices, opportunities remain for value-driven products. Recent trade developments, including a temporary 10% duty under Section 122, provide a limited window for Sri Lanka to engage in policy advocacy.
Ongoing Section 301 investigations by the United States Trade Representative also present an opportunity to highlight Sri Lanka’s strong labour standards. With public hearings approaching, the country has scope to build on previous successes in reducing tariffs through proactive engagement. However, industry stakeholders emphasise the need for parity in tariff structures with competing nations to maintain competitiveness.
In Europe, Sri Lanka’s second-largest market, exports declined by just under 8%, reflecting relatively stable demand amid global uncertainty. Key markets including Italy, Germany, the Netherlands, Belgium and France continue to perform steadily, while growth in Spain suggests potential for diversification. Securing the renewal of GSP+ trade preferences beyond 2027 remains a central priority to sustain and expand market access.
Elsewhere, India emerged as a bright spot with nearly 10% growth in Q1, highlighting untapped potential in regional markets. Industry leaders note that the long-standing 8-million-piece cap under the Indo-Sri Lanka Free Trade Agreement limits expansion, and advocate for its revision or replacement through new agreements such as the proposed ETCA.
The United Kingdom is also showing positive signs, supported by improvements under the Developing Countries Trading Scheme. Growth in womenswear and schoolwear segments is helping to build momentum for broader recovery.
Industry body JAAF has outlined a focused action plan centred on immediate priorities: accelerating energy reforms to ease cost pressures, securing GSP+ status for Europe, engaging with the United States on trade measures, and expanding access to the Indian market.
Despite current challenges, Sri Lanka’s apparel sector retains strong fundamentals, including a skilled workforce, established buyer relationships and strategic geographic positioning. With timely and targeted policy support, the industry is well placed not only to stabilise but to strengthen its competitive position globally.
